Fed expert still sees growth for 2012; Says inflation is not a near-term worry

Federal Reserve Bank of Philadelphia President Charles Plosser said he hasn't significantly cut his forecast for 2012 U.S. economic growth as the impact from "shocks" like the earthquake in Japan subside.

"I'm inclined not to be marking down my 2012 forecast very much," even though [my] "short-term forecast has moved around," Plosser said last week in an interview. He declined to specify how much he has cut his earlier prediction for 3 percent to 3.5 percent growth in 2012, and also said he has lowered his expectations for 2011.

Plosser dissented from the Federal Open Market Committee's decision on Aug. 9 to boost growth by pledging to keep interest rates near zero until mid-2013. Instead, he urged fellow policy makers to maintain a pledge to hold rates at a record low for an unspecified "extended period."

"I'm worried we painted a picture" that was "more negative than justified," and that taking action after stocks tumbled "signaled that we are in the business of supporting the stock market," Plosser said in New York. He is also concerned "we box ourselves in" if economic conditions warrant an interest rate increase sooner than two years from now.

Plosser said he's not opposed to a third round of asset purchases by the central bank should the U.S. face a broad-based decline in prices or "a financial meltdown of some kind."

"Clearly we would have to respond as lender of last resort" and "that might include more bond purchases," Plosser said. He said he doesn't foresee such a crisis happening.

The Fed's second round of asset purchases was effective at raising inflation expectations and rising deflation risk "would clearly call for additional accommodation," he said. Deflation concerns are less now than they were a year ago, as "inflation clearly has accelerated since last fall."

Plosser, who in March laid out a strategy for withdrawing the Fed's record monetary stimulus, also said he's not yet seeing signs of runaway inflation.

"I'm not worried about inflation in the near term," Plosser said. "I'm not panicked about inflation."

Plosser said he is more concerned about inflation in 2012 and 2013. "There could be a price at the other end of this," he said.

Plosser said the Fed's pledge to keep interest rates low for two years is unlikely to be effective at accelerating growth.

"What we did isn't going to work," Plosser said. "Our problems are not problems easily addressed by monetary policy," he said. "You're stuck with a central bank that's risking its credibility because it's doing things that don't work."